BANK GUARANTEE &

LETTER OF CREDIT

Submitted by

Anil Nandyala (B11005)

Ankita Singh (B11007)

Sumit Khandelwal (B11048)

AGENDABank Guarantee

DefinitionProcess FlowTypes of Bank GuaranteeBenefitsBank ChargesDocuments RequiredBG Assessment

AGENDA (CONTD)Letter of Credit

DefinitionTypes of Letter of CreditProcess FlowLC DiscountingHedgingBenefitsCommon Reason for LC failureDocuments RequiredAssessment of LC

BANK GUARANTEE An assurance by the bank ensuring that

the liabilities of a debtor will be met Ensure payment to beneficiary in case

of non-performance by applicant Aim at preventing frauds and helping

banks serve genuine customers Facilitates more confidence to do the

business Issued for a period till the execution of a

contract

PROCESS FLOW

TYPES OF BANK GUARANTEE Performance guarantee

Fix the financial liability upon the banker in the event of failure in performance

Advance payment guarantee Provides security to importer if exporter does not

deliver under the terms and conditions Deferred payment guarantee

Customers make payment in certain installments and on specified dates

Foreign bank guaranteeIssued in foreign currency to beneficiary

outside the country for overseas obligations

BENEFITS Reduces many business transactions

risks Reliable security instrument in both

international and domestic trade Provides immediate funds to the

business in the form of payment guarantees

Gives ample time to make payments in case of deferred payment guarantees

Provides better negotiable terms and conditions to the buyer and seller

BANK CHARGES Limit Based BG:

Working Capital Finance is required1% fees charged

FD based BGFor foreign BG you have to 110% marginFor Inland BG you have to keep 100

%margin5500 is the minimum fees charged on BG

DOCUMENTS REQUIRED Address Proof Identity Proof Business Proof Last 3 years P&L and BS(duly signed by CA) Last 1 year Bank Statement of the firm If existing loan, detailed document of the

same Individual IT Returns of the

individual/partners/directors for the last 3 years

SEBI formalities in case of listed companies

BG ASSESSMENTSr .No. Particulars Amount

A Value of contracts expected to be bid 1000.00

B EMD Guarantee (generally 3% to 5% of A), Here we will assume 5%

50.00

C Expected value of the new contract (25% of A), It may vary from company to company

250.00

D Performance Guarantee (Normally 10% of C) 25.00

E Advance Payment / Security Deposit Guarantee (5% of C),This may vary from project to project.

12.50

F Fresh Guarantees required (B+C+D+E) 337.50

G Existing bank guarantees (Assumption) 100.00

H Guarantees expiring during the year 25.00

I Guarantees requirement (F+G-I) 412.50

J Total guarantees limits required 412.50

LETTER OF CREDIT

LETTER OF CREDIT An arrangement where by bank at

customer’s request undertakes to pay his creditor

Used worldwide for settlement of trade between exporter and importer

Sophisticated and popular method of payment

PROCESS FLOW

TYPES OF LETTER OF CREDIT Revocable L.C

Can be cancelled at any time by any party without consent

Irrevocable L.CCannot be cancelled at any time without

advising the seller Sight L.C

Documents are released to creditor on payment

Usance L.CDocuments are handed over on

commitment on payment at a future date(available to 180 days)

LETTER OF CREDIT DISCOUNTING Seller discount’s the bill

DISCOUNTING:DurationInterest rates

HEDGING Forwards or Future contracts Options

BENEFITS Opens door to international trade by

provide secure payment Bank substitutes to buyer Bank Expertise is made available to help

complete trade transactions completely Payment for the goods shipped can be

remitted to your own bank or bank of your own choice

Payment will be made to seller when T&C of the L.C are compiled with

Importer can control shipping dates for the goods being purchased

COMMON REASONS FOR LC FAILURE Time Lines

Shipment failsDocuments on timeExpiry of LC

Discrepancy Within LC Compliance with Documents &

Conditions

DOCUMENTS REQUIRED Commercial Invoice Transport Documents

Bill of LadingAir bill

Insurance Documents Inspection Certificates Certificate of origin

ASSESSMENT OF LC

Assessment of LC Rs in Mn Rs in Mn

Total Purchase A 100

Purchase under LC (x%) B=A*X% 60

Period under LC (Y days) Y 30 days

Lead Time under LC inCase of offsite

Z 90 days

LC Requirement C=(B*(Y+Z)/365) 19.73

THANK YOU